Surrendering Cash Value Life Insurance: When And Why To Do It

Cash surrender value is the amount of money a life insurance policyholder receives for cancelling their policy before it matures or they pass away. This value is the total accumulated cash value minus prior withdrawals, outstanding loans, and surrender charges. Permanent life insurance policies, such as whole life and universal life, have a cash value component that grows over time, allowing policyholders to build wealth. Policyholders can access this wealth in various ways, such as withdrawing or borrowing against their cash value or surrendering their policy altogether. The decision to surrender a policy depends on the individual's financial situation and goals, and it is important to consider the potential fees and taxes associated with surrendering.

Cancelling a permanent life insurance policy

The first step in cancelling a permanent life insurance policy is to review the policy details and understand the potential financial implications. This includes calculating the surrender value, which is the amount of cash built up in the policy minus any surrender charges or fees. These charges can vary but are typically between 5 and 10% of the policy's face value. It is also important to consider the tax implications, as any amount received above the total premiums paid may be subject to income tax.

The next step is to contact the insurance company to initiate the cancellation process. This can be done by phone or in writing, and it is important to follow the correct procedure to avoid delays or additional fees. The insurance company will provide information on the specific steps required to cancel the policy, including any necessary forms or documentation.

After cancelling a permanent life insurance policy, the insurance company will send a check for the policy's cash value, minus any fees or charges. This amount is typically received within 30 days of cancellation. It is important to note that cancelling a permanent life insurance policy will result in a loss of coverage and may have financial implications, such as higher premiums if a new policy is needed in the future.

Before cancelling a permanent life insurance policy, it is worth exploring alternative options. For example, if the premiums have become difficult to manage, it may be possible to reduce the policy's face amount or explore other coverage options. Additionally, selling the policy for a lump sum may be a more beneficial option than cancelling it, as it can provide a higher payout.

Surrender charges and fees

When you surrender a life insurance policy, you may be subject to surrender charges, which are fees imposed by the insurance company for cancelling the policy. These charges are typically highest in the early years of the policy and decrease over time. Some policies may have a surrender period, during which the surrender charge applies, typically ranging from 10 to 15 years. After this period, the surrender fees are usually waived. It's important to review your policy documents to understand the specific surrender charges and fees associated with your policy.

The surrender charge is calculated as a percentage of your policy's cash value. This percentage can vary, but it often starts at a significant rate, such as 10% to 35% of the policy's cash value. For example, if your policy has a cash value of $20,000 and a 5% surrender charge, you would pay $1,000 in charges and receive $19,000 as the surrender value.

In addition to surrender charges, there may be other fees associated with surrendering your policy. These fees can include withdrawal fees, taxes, and penalties. It's important to note that the cash surrender value is typically calculated as the total accumulated cash value minus any surrender charges, prior withdrawals, outstanding loans, and applicable fees. Therefore, these additional fees can further reduce the amount of money you receive when surrendering your policy.

To make an informed decision, it is crucial to carefully review the terms and conditions of your life insurance policy. Understanding the specific surrender charges, fees, and calculations outlined in your policy documents will help you accurately determine the net amount you will receive after surrendering. Consulting with a financial professional or your insurance company can also provide valuable insights and guidance tailored to your specific situation.

Cash value vs cash surrender value

Cash value and cash surrender value are two different components of permanent life insurance policies. Permanent life insurance policies, such as whole life and universal life insurance, offer death benefits protection and can also be a wealth-building asset.

Cash value is the savings component of permanent life insurance policies. It is also known as the policyholder's equity. This value is the sum of money that grows inside a permanent life insurance policy or a cash-value-generating annuity. Cash value is built through premium payments, with a portion of the premiums set aside by the insurance provider to earn interest. This value can be accessed in several ways, such as policy loans, withdrawals, or to help pay premiums. It is important to note that not all types of life insurance provide cash value, and it is separate from the policy's face value, which is the death benefit.

On the other hand, cash surrender value is the amount of money a policyholder receives if they cancel their permanent life insurance policy before it matures or before their passing. It is calculated by taking the total accumulated cash value and subtracting any prior withdrawals, outstanding loans, and surrender charges or fees. Surrender charges are fees imposed by the insurance company for cancelling the policy early, and they can significantly impact the cash surrender value. These charges tend to decrease over time and may be eliminated after a certain period, resulting in the cash value and surrender value being the same.

The decision to surrender a permanent life insurance policy depends on various factors, including the policyholder's financial goals and circumstances. Surrendering the policy may provide access to a lump sum of money, but it is important to consider the potential downsides, such as losing life insurance protection and incurring fees that reduce the cash value. Additionally, there may be tax implications if the surrender value exceeds the total premiums paid.

In summary, cash value represents the savings component of a permanent life insurance policy, while cash surrender value is the actual amount received if the policy is cancelled early. It is important for policyholders to carefully review their policy contracts, understand the fees associated with surrendering the policy, and consider alternative options, such as withdrawals or loans, before making a decision.

Withdrawing from cash value

Withdrawing from your cash value is a way to access your wealth without taking out a loan or giving up your life insurance policy. However, there are a few things to consider before making a withdrawal.

Firstly, it's important to understand the difference between cash value and cash surrender value. Cash value is the amount of money in your life insurance policy that grows over time. It functions like a savings account, with a portion of your premiums going towards this balance, which earns interest. On the other hand, cash surrender value is the amount you receive if you choose to cancel or surrender your life insurance policy. It is the cash value minus any surrender charges, fees, policy loans, or prior withdrawals.

When you make a withdrawal from your cash value, it will be subtracted from your death benefit, which means your beneficiaries will receive less after your death. Withdrawals may also trigger tax consequences if you withdraw investment gains. Therefore, it is important to carefully review your policy documents and understand the terms and conditions before making any withdrawals.

It is worth noting that not all types of life insurance offer cash value. Permanent life insurance policies, such as whole life and universal life, typically include a cash value component. These policies allow you to build cash value over time as you pay your premiums, and you can then withdraw from this balance if needed. However, it is generally recommended to maintain a certain level of cash value in your policy to avoid reducing your death benefit or causing your policy to lapse.

In conclusion, withdrawing from your cash value can be a useful way to access funds without surrendering your life insurance policy. However, it is important to consider the potential impact on your death benefit and any tax implications before making a withdrawal. Reviewing your policy documents and seeking financial advice can help you make an informed decision that aligns with your unique financial goals and circumstances.

Borrowing against cash value

The cash value of a life insurance policy is the total accumulated cash value, minus prior withdrawals, outstanding loans, and surrender charges. This value grows over time as you pay premiums. The longer you hold the policy, the more the cash surrender value will be reflective of the cash value. This is because surrender charges, which are fees for cancelling your policy, go down over time and eventually disappear after 10 to 15 years.

Life insurance companies typically allow you to borrow up to around 90% of the current cash value of your plan. This means that if you've accumulated $5,000 in life insurance cash value, you may be able to take a loan for up to $4,500. Your policy is used as collateral for the loan, and if you pass away before paying it back, the outstanding balance will be subtracted from the death benefit payout to your beneficiaries.

There are several advantages to borrowing against your life insurance policy. Firstly, there are no additional requirements such as a credit check, employment verification, or minimum income requirements. Secondly, there are no restrictions on how you can spend the money. Thirdly, life insurance loans are generally tax-free, although there may be tax implications if you don't repay the loan. Finally, there is no strict repayment schedule, although it is in your best interest to pay back the loan as soon as possible to minimise the interest you will owe.

However, there are also some disadvantages to consider. Firstly, if the amount you owe exceeds the cash value of your policy, it may lapse. Secondly, if you don't make regular payments, your policy will also be at risk of lapsing. Finally, if you die with an outstanding loan on your policy, your beneficiaries will receive a reduced payout.

Frequently asked questions